We generalize an earlier model of international vertical pricing to explain key features of parallel imports, or unauthorized trade in legitimate goods. When a manufacturer (or trademark owner) sells its product through an independent agent in one country, the agent may find it profitable to engage in parallel trade, selling the product to another country without the authorization of the manufacturer. Although parallel imports can be deterred when the manufacturer's wholesale price is sufficiently high, there is a trade-off between improving vertical pricing efficiency and reducing parallel imports. In equilibrium, parallel imports can come from a country with higher retail prices, which is consistent with some factual data. While countries have varying interests in such a policy, restricting parallel imports tends to increase global welfare when trade cost is high, but may reduce welfare when trade cost is low. This finding suggests that open parallel trading regimes may be most appropriate within regional trade agreements.
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